How to calculate Lifetime Value

1. Strategy
CUSTOMER LIFETIME VALUE

2. Strategy
What is Customer Lifetime Value?
Roughly defined, LTV is the projected revenue that a customer will
generate during their lifetime.
E.g.
5 customers go to Starbucks, on average spend £5.90 per visit
Average number of trips for the 5 is 4.2 per week
Average customer value per week = £24.30
Average customer lifespan = 20 years
Simple Lifetime value = £25,272

3. Strategy
Profit Based Lifetime Value
The same example, if we bring in average profit margin it can show us
the average profit per customer over the lifespan.
Starbucks profit margin = 21.3%
Using previous figures:
52(5.90 x 4.2 x 0.213) x 20 = £5,489

4. Strategy
Traditional Lifetime Value
We can use a 3rd calculation that integrates customer retention rate and
discounted cash flow interest rate (value of future monies now)
Starbucks profit margin = 21.3%
m = Customer lifetime value (simple method) x profit margin: £5382.94
(average gross margin per customer lifespan)
r = Customer retention rate: 75%
i = discounted cash flow interest rate: 10%
LTV = m(r/1 + i – r)

5. Strategy
Traditional Lifetime Value
LTV = m(r/1 + i – r)
5382.94(0.75/1 + 0.1 – 0.75)
= £11,535
Average Lifetime Value = average of all 3 calculations
= £14,099

6. Strategy
Why is lifetime value so important?
Lifetime value is important:
It helps us to analyse how much one customer is worth
It shows us how much we can invest to acquire that one customer. This
is customer acquisition cost. (CAC)
In our example, we have to spend less than £14,099 or else we would
technically be losing money straight away.
The more we can invest to acquire a customer, the more customers we
can acquire, and the more we can grow relative to our competitors.
We can effectively price our competitors out of the market.

7. Strategy
Why is lifetime value so important?
THE MORE WE CAN INVEST TO ACQUIRE A
CUSTOMER, THE MORE CUSTOMERS WE CAN
ACQUIRE, AND THE MORE WE CAN GROW
RELATIVE TO OUR COMPETITORS.
WE CAN EFFECTIVELY PRICE OUR COMPETITORS
OUT OF THE MARKET.